Partnerships and S corporations^[15] are generally not federal (or state) income tax–paying entities. Partnerships file an annual informational income tax return on Form 1065. The return reports the results of operations. An accompanying form, Schedule K-1 with instructions, reports separate income, deductions, losses, and credits that flow through to the partners. The partners, in turn, report the various items on their individual income tax returns. Items that reported separately from results of operations are items, which will have limitations or requirements that could be different for different partners. For example, contribution limitations are based on an individual’s AGI.

S corporations are a special form of corporation treated in tax law like a partnership. There are differences, however, like the limitation on the number of shareholders (100 maximum, while there can be unlimited numbers of partners) and allocations of income and expenses are based on the number of shares held, while partnership allocations are based on the amount of equity invested by the partners and/or any other agreements the partners have made. S corporation results of operations and other income and expense items are also reported on a Schedule K-1 with instructions to shareholders. Copies of the K-1 accompanies the S corporation tax return, Form 1120S.

A partner or S corporation shareholder reports distributive income and losses in Part II, Schedule E Supplemental Income and Loss.

Royalties are ordinary income from copyrights, patents, and oil, gas, and mineral properties. Generally, royalties are reported in Part I, Schedule E, Supplemental Income and Loss. If a taxpayer is also self-employed, for example a writer receiving royalties, the income and expenses would be reported on Schedule C or C-EZ.

Go to Publication 17, Chapter 12 and read the sections: Partnership Income, S corporation Income, and Royalties.